Thursday, May 17, 2012

1 -- Investor risk preferences. With interest rates at 0 forever,
prices will escalate. Stocks are super cheap (14x multiple?). It follows that speculative
money will flow to stocks. And not just
any stocks, growth stocks! There aren’t many exciting companies left in the US,
and Facebook is one of the few. So sector allocation will be heavily weighted
to growth/Facebook. Or just Facebook. On a related note: long QQQ.

2 -- Exponential growth. Let the good times keep on rolling. To clarify:

3 -- People love social media for some reason. And Facebook
is one of the few companies in the social media group with a long term
profitable business model. Facebook's prospects are much more attractive than
other recent IPOs such as LNKD, P, ZNGA, etc.

4 -- Inflation is a thing. That may or may not happen. And GDP
targeting? Good for prices.

5 -- I love the short case. If you are going short (there
sure are a lot of you!), please sell Facebook as soon as possible. Give me that
sweet discount.

People talking about valuation, get ready to lose your
lunch. Sure the valuation is ridiculous, but it will get more ridiculous. If
you are still thinking "little upside, and a lot of downside," refer
back to my chart.

Monday, January 16, 2012

Wednesday, December 14, 2011

Anyone who has been to the Halal Guys stand on 53rd street and 6th avenue knows why I am writing this article. There are hundreds of food carts in NYC, but only one that serves halal (others are proprietors of inferior lamb and rice). As per Halal Guys’ slogan: “we are different.”

Get involved with the sauce

For those of you who have not been there, the Halal Guys is good enough to kill for (see 2006 stabbing incident ). It boasts long lines at all times of day. And the food is well worth the wait.

I have constantly wondered about the state of their business. How long is the average line? How many plates of halal do they serve? What are their margins like? What is their enterprise value? After over a month of observation (timing and counting the number of plates served per minute), here is what I have come up with:

The locations will be defined as follows:
cart 1 – 53rd and 6th on the south west corner of the street from 7:30pm – 4:00am

cart 2 – 53rd and 6th on the south east corner of the street from 12:00 pm – 4:00am

cart 3 – 52nd and 6th on the south west corner of the street. from 12:00pm – 4:00am

cart 4 – 53rd and 7th on the south west corner of the street from 12:00pm – 4:00am

Note: all carts are open until 5am on Friday and Saturday.

The first metric to discuss is the number of plates served per minute (PPM). All of my observations were performed at cart 2 during lunch and late-night hours. My assumptions on volume are as follows: (1) cart 1 is more popular while open, and averages about 20% more volume and efficiency than cart 2; (2) carts 3 and 4 are less popular and average about 30% less volume and efficiency than cart2; (3) Each cart’s PPM shows the same sinusoidal curve throughout open hours with peaks during lunch and late-night hours. My findings are shown below:

Hour 1 corresponds to the hour between 12:00 and 1:00pm. Hour 17 is the hour between 4:00am and 5:00am.

Note that the PPM numbers are for an average day. Weekends obviously have more customers and more plates of halal served at night than do weekdays. There is seasonality and other factors (huge demand on New Year’s Eve, Halloween, etc.) that also affect the number of plates served. My observations were made in October and November, fairly temperate months, and indicate a good baseline for an aggregate day of halal.

From the PPM metric we can derive the total number of plates served per hour:

In order to derive profit information I had to make some assumptions about the halal guy’s expenses. Since most halal carts are profitable selling their lamb and rice for $5, it follows that the actual cost of goods sold is less than $5 (even though the Halal Guys serve bigger plates and thus more food. See thisarticle, which estimates a 10% margin for DC food trucks). I assume cost per plate of $4.25, which includes all costs associated with producing a plate of halal besides staffing. I also assume a generous salary of $10 per hour for each employee and three employees per stand each operating hour.

It is important to note that aside from the $6 price charged per plate, the Halal Guys allow customers to cut the line for $10. Due to this higher price option, the average price per plate is a function of demand. The average price per plate is assumed to be $6.05 (about 1 in every 100 skipping the line) at lunch, and $6.20 during peak late-night hours. Multiplying the plates produced per minute by the assumed hourly halal prices, and applying the expense assumptions highlighted above, we arrive at the following revenue/expense numbers:

Note the higher margins during the late night hours, where larger PPM volume discounts the effects of labor fixed costs. Calculated metrics are below:

Time

Avg Price

Revenue

Expenses

Margin

Profit

12:00

6.05

1011.05

800.24

20.9%

210.81

13:00

6.05

1112.16

871.27

21.7%

240.89

14:00

6.00

954.95

766.42

19.7%

188.53

15:00

6.00

907.20

732.60

19.2%

174.60

16:00

6.00

861.84

700.47

18.7%

161.37

17:00

6.00

818.75

669.95

18.2%

148.80

18:00

6.00

777.81

640.95

17.6%

136.86

19:00

6.00

1225.05

987.74

19.4%

237.31

20:00

6.00

1310.81

1048.49

20.0%

262.32

21:00

6.00

1402.56

1113.48

20.6%

289.08

22:00

6.00

1500.74

1183.02

21.2%

317.72

23:00

6.05

1664.57

1289.33

22.5%

375.24

00:00

6.10

1930.08

1464.73

24.1%

465.35

01:00

6.20

2059.80

1531.96

25.6%

527.84

02:00

6.10

1925.25

1461.36

24.1%

463.89

03:00

6.05

1623.05

1260.16

22.4%

362.89

04:00

6.00

1207.23

975.12

19.2%

232.11

Applying the average day numbers obtained above results in the following yearly performance metrics:

Per Day

Per Year

Plates

3,686

1,345,544

Avg Price

6.04

6.04

Revenue

22,292.90

8,136,907.92

Expenses

17,497.29

6,386,512.48

Profit

4,795.60

1,750,395.44

Margin

21.5%

21.5%

The results here are much higher than I expected. The Halal Guys serve over 1.34 million plates of halal per year for over $1.75 million in profit. Not to mention the 21.5% margin!

Valuing the Halal Guys now becomes easy (using Discounted Cashflow Analysis). The only assumptions left to make are the growth rate and the rate at which to discount future cashflows. Given that the Halal Guys have been increasing the number of carts in the area by about one every two to three years, a 5% per year is a fair and conservative estimate for growth.

As for discount rate, the weighted average cost of capital for other fast food vendors is as follows:

Chipotle

10.96%

McDonald's

6.83%

Yum Brands

8.52%

Wendy's

8.55%

These companies are public and have high transparency. The Halal Guys ostensibly presents more risk to future cash flows, as there are many unknown factors in play (fights amongst the proprietors, disagreements with the city, etc.) they could just shut down shop; we don’t know what is going to happen. I am applying a 15% discount rate to account for this additional risks.

You are free to determine your own appropriate growth and discount rates, with the sensitivity matrix shown below (discount rate on the x-axis, and growth rate on the y-axis):

10.0%

12.5%

15.0%

17.5%

20.0%

0.0%

$17,503,954

$14,003,164

$11,669,303

$10,002,260

$8,751,977

2.5%

$23,922,071

$17,941,553

$14,353,243

$11,961,036

$10,252,316

5.0%

$36,758,304

$24,505,536

$18,379,152

$14,703,322

$12,252,768

7.5%

$75,267,004

$37,633,502

$25,089,001

$18,816,751

$15,053,401

10.0%

NA

$77,017,399

$38,508,700

$25,672,466

$19,254,350

The other potentially dubious assumption made is in the cost of goods sold. My $4.25 estimation could be off, so I have provided some additional valuations keeping all other factors constant (5% growth rate and 15% discount rate), while adjusting the cost per halal plate produced:

Thursday, November 10, 2011

Willy Staley of theawl wrote an article this week title "A Conspiracy of Hogs: The McRib as Arbitrage." He points out the correlation between McDonald's introduction of the McRib and pork prices. According to the Pork Cycle, supply and price of livestock is cyclical as changes in demand cannot easily be met due to gestation and breeding.

What Staley fails to consider is that McDonalds has not only introduced the McRib when pork is cheap, but also when beef is relatively expensive. See the graph below where the spread between the spot price of live cattle (beef) and lean hogs (pork) is shown:

Live cattle shown in orange, lean hogs shown in white, and the spread is yellow. The same five events are market as previous key.

During the five periods mentioned by Staley, a particularly wide spread exists between the two meats. There is a wide spread right now, as the McRib is being served. Thats six for six!

Ostensibly the McRib cannibalizes demand for other purchases. Customers who buy the McRib are often switching from BigMacs. The two are comparable products. Introducing the McRib while pork is cheap and beef is expensive maximizes profit, improving margins.

Watch the spread (not seasonality, or the price of pork!) to see when the McRib is coming back.